Posted on 12/28/2009 8:02:04 AM PST by blam
Why Gold Will Be The “Greatest Trade Ever”
Commodities / Gold and Silver 2010
Dec 28, 2009 - 09:48 AM
By: Money_Morning
Peter Krauth writes: Forget about all the forecasts being made for 2010. Here's my prediction for 2015: An entirely new name - John A. Paulson - will grace the coveted top of the annual Forbes billionaires list.
And the gap between Paulson and the runner-up billionaire will be huge.
Everyone knows that Bill Gates and Warren Buffet are America's - and the world's - two richest men. But the financial crisis of 2008 and 2009 was not kind to either of them, eradicating $17 billion of their combined net worth.
On that famed list, at No. 33, is where you'll find Paulson today. The hedge-fund manager's financial acumen led to what is now being called the "the greatest trade ever." By shorting the subprime mortgage market, Paulson & Co. Inc. generated a $15 billion gain.
Paulson's personal net worth of $6 billion is impressive in its own right. But over the next several years, I believe that Paulson's trading savvy will vault him into the top spot.
And the vehicle that will take him there is gold.
Going For the Gold
Paulson's latest foray says a lot about how he intends to further multiply his own net worth, as well as that of his clients.
That foray will focus on gold, he said during an address to the Japan Society in New York earlier this month.
"As an investor, I became very concerned about having my assets denominated in U.S. dollars," Paulson told his audience. "So I looked for another currency in which to denominate my assets in. I feel that gold is the best currency."
As of June 30, gold and gold-related assets accounted for 46% of the Paulson firm's total holdings - a colossal position that flies in the face of traditional portfolio-diversification theory and position sizing. Yet I expect this will help him generate a brand new "greatest trade ever."
It's also worth noting that Paulson recently announced his firm's plan for a Jan. 1 launch of a dedicated gold fund. The fund will invest in gold stocks and gold derivatives in a way that will enable it to outperform the price of gold. Paulson is committing $250 million of his own capital to this new investment vehicle. This all adds up to one enormous wager on gold. But Paulson's track record and reputation for research diligence make it impossible to ignore.
The story behind the killing that Paulson's company made on the subprime-mortgage crash - and the lengths that Paulson and star analyst Paolo Pellegrini went to create the profit opportunity - is as gripping as any detective story.
Although it's now referred to as the "greatest trade" ever, it certainly wasn't the easiest position to take. Paulson and his cohorts watched from the sidelines as the housing industry zoomed through four years of unprecedented growth. When Paulson bet against the bubble, and continued to increase his position even as housing continued its surge, he found that many longstanding customers that had profited nicely from Paulson & Co. refused to go along.
Paulson, they felt, was flat out wrong.
[snip]
Being right once does not mean you will be right twice.
Bankers and Economists Say Gold is a Bubble. Here’s Why You Should Ignore Them
Paulson is a pretty sharp guy and so is his lead guy mentioned in the article.
The way I see it, there are only two possibilities:
1. There is FAR MORE gold in circulation than anyone realizes and when the realization finally hits the value of gold will drop dramatically.
or
2. There is a lot of gold being sold that doesn't exist and when the fraud is exposed the gold market will collapse (those who own physical gold BELIEVE they will be protected, but in reality the people who would be interested in buying will have been wiped out).
In either case, gold is being traded based upon huge misconceptions and these will ultimately result in a major correction.
Bankkers and economists are notoriously lousy investors.
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